Robert Kennedy College

[Apr. 2010]

Final exam

Financial Management - Prof. David Duffill

Tottenham Hotspur plc.

Financial analysis & Recommendations

Cosimo Gualano – MBA course 57609

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Table of Content

Table of Content ........................................................................................................................... 2

1. Professor’s Note .................................................................................................................... 3

a. What you did well: .................................................................................................................................... 3

2. Executive Summary ............................................................................................................... 4

3. Discounted cash flow (DCF) analysis ....................................................................................... 5

a. Estimation of Cash Flow ............................................................................................................................ 5

b. Analysis to assess the Net Present Value of the company ....................................................................... 5

4. Tottenham Hotspur – Team evaluation .................................................................................. 5

5. Stock price and Seasonal performance analysis ...................................................................... 6

a. Stock Value ................................................................................................................................................ 6

b. Tottenham Games and Stock Market reaction ......................................................................................... 7

6. DCF-based investment decisions ............................................................................................ 7

a. Build a new stadium with Financing of $250M ......................................................................................... 7

b. Sign in a new striker, in addition to build a new stadium ......................................................................... 7

7. Recommendations ................................................................................................................. 8

8. Bibliography .......................................................................................................................... 8

DECLARATION OF ORIGINALITY OF WORK..................................................................................... 8

CERTIFICATION OF AUTHORSHIP................................................................................................... 8

Exhibit 1 – DCF analysis current operations - Page 1 of 2 ............................................................... 9

Exhibit 1 – DCF analysis current operations - Page 2 of 2 ............................................................. 10

Exhibit 2 –Team Valuation, Revenues and Records – Page 1 of 2 ................................................. 11

Exhibit 2 –Team Valuation, Revenues and Records – Page 2 of 2 ................................................. 12

Exhibit 3 – Games and Stock Market reaction ............................................................................. 13

Exhibit 4 – DCF analysis in Building a new Stadium with Financing .............................................. 14

Exhibit 5 – Cash Flow Projection for the New Stadium without Financing .................................... 15

Exhibit 6 – DCF analysis for a New Stadium and New Player ........................................................ 16

Exhibit 7 – DCF analysis comparison of three different options ................................................... 17

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1. Professor’s Note - Grade: A

a. What you did well Overall report layout was very good, and included a cover page, table of contents and page numbering; references were cited and referred to specific points in the assessment text. The assignment was submitted on time. Your Executive Summary was very good, and you appear to have appreciated the fact that there would be a synergistic benefit from undertaking both investments. The calculation of the DCF value of the firm was in line with the prediction you made and the capital expenditure was correctly deducted from the cash flow, as well as changes in the net working capital (inventory plus accounts receivable minus accounts payable) which can be assumed to increase in proportion to revenue. Your Exhibit 4 analysis is clearly showing a loan as a positive cash flow, effectively making the cash impact of the investment. Correctly interpreted.

b. What you could have done better:

In making the estimation of the Net Present Value of the club you also need to make some assumption for the terminal value of the cash flows. The total discounted cash flow gives the enterprise value of the firm, but to reach the equity it is necessary to subtract the net debt, giving a total value of the equity of about £118 million, or £12.70 per share. With the current stock price at £13.80, the club appears to be slightly overvalued.

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2. Executive Summary

Tottenham Hotspur Football Club is a leading English professional football club and a member of the

Premier League. Tottenham Hotspur (TTNM.L) is quoted at the London Stock exchange.

Daniel Levy, chairman from 2001 of Tottenham Hotspur, is considering different possibilities to take

his football club to the upper echelon of the British Premier League. To achieve this result and

establish a consistent foundation for a long-term financial success he sees the need for 2 things:

building a new stadium and improve the quality of the team through prudent player acquisition.

Three alternatives have been investigated using a DCF financial analysis:

1. Operating the existing current stadium with 36,500 seats while keeping a single goal-scorer (Pavlyuchenko)

2. Building a new 60,000 places stadium with external financing 3. Sign in a new top scorer playing in the new stadium.

Under the first alternative, the Net Present Value for Tottenham, during the 13 years’ forecasted period, is calculated at £67.68M. The positive NPV suggests that the decision to keep the current operation will be welcomed by shareholders. However the company has currently high operating cost with Net income accounting only for 2% of total revenues. The alternative two present a NPV of £27.51 while the alternative three has a more favourable value of the NPV of £82.32M. The option of Stadium and Player will increase substantially the operating incomes form 2010 onwards, if predicted growing rates apply. Exhibit 7 provides additional elements to support this decision. Additional analysis has been carried out to provide more information of the financial position of the company. The Tottenham, when compared with the top 8 teams in the premier league, is well positioned with a low level of Net Debt and Revenues, Operating incomes in line with their average scoring points. Tottenham seems to operate against its revenue quite well in relation to the average net goal.

Current stock price of £13.80 seems quite high if related to the estimated Company Fair value and

P/E ratio. The fair value of the stock price is estimated at £5.42.

Tottenham has improved its number of matches Won, from May 04 to May 06. The stock price

TTNM.L has reacted positively with a less variation % and more in line with FTSE market variations.

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3. Discounted cash flow (DCF) analysis

a. Estimation of Cash Flow

The following assumptions have been made in the estimation of cash flow: Interest payments are not

included. Net Investment is based on maintenance capital expenditure minus the depreciation related to

Capex. Working Capital is based on the difference between current assets minus current liabilities. As

typically working capital increases as sales revenues, in the calculation it is assumed that working capital is

proportional to Revenue growth of 9%, except for the last year’s prediction where growth is forecasted at

4%.

b. Analysis to assess the Net Present Value of the company

The Net Present Value for Tottenham is calculated at £67.68M. The positive NPV suggest that the decision to

keep the current operation will be welcomed by shareholders. The Exhibit 1 shows the calculation of the NPV

and a chart showing the performances of of key metrics during the forecasted period.

The Payroll accounts for 81% of the operational costs while only 17% is used for the stadium operations.

Broadcast is the highest provider of income (39%) followed by Attendance (23%), Sponsorship (21%) and

Merchandise / Other (17%). With the current high operating cost is not surprise that the EBITDA is only 9% of

total Revenues while Net income account only for 2% .

Even though the Tottenham is performing financially well compared to the other 8 premier league’s teams,

the Current ratio (liquidity) of 0.75 may suggest that the company may have some difficulties in paying back

its coming obligations. The company has higher value of current liabilities (£64.40M) compared to its current

assets (£48.07M). The Acid test ratio of 0.73 does support this thesis.

The ROCE (profitability) of 5.63% suggest that the company pays more in its borrowings, reducing

shareholders’ earnings. The company ROCE is based on Sales revenues to Capital employed of 0.83 (low

margin/high turnover ) and Operating pofit margin of 6.75%. This means that the company makes 6.75p

(before interest and taxes) for every £ of sales.

The Company’s Net Debt of £16.79M seems low on average Net debt for a company in a similar ranking

position. Exhibit 2

4. Tottenham Hotspur – Team evaluation

The performance’s chart in Exhibit 2, is showing the position of Tottenham against seven other premier

league’s football clubs. The Enterprise Value (EV) has been used as a reference value to rank the teams.

EV is normally used to compare different companies with varying levels of debt. However, enterprise value by

itself is not a precise indication of the company’s financial position because the EV can be originated by large

quote of Debt. Moreover, a more accurate analysis would have required comparing the same data during a

certain period of time.

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Due to the nature of scale of measure being used to plot the data, the different metrics has been divided in

different charts. Considering the large difference in team performances it is useful to divide them in two

different groups. Hence, two different scales have been used. The first group from Manchester to Liverpool

characterized by medium to high Enterprise Value, Net debt and Revenues over £100M. The second group of

teams with Tottenham in second position, with medium low Net debt and Revenues below £100M.

Tottenham seems fairly financially healthy in comparison. The value of Revenues is far ahead compared to

the value of the Net Debt with positive Operating incomes in line with the team’s average points. The

operating profit margin’s % seems a bit healthier than the other teams in the same group.

The EV to Revenue shows how Tottenham’s revenues are being valued by the market. Since revenue is

unaffected by the interest income/expense line item, the appropriate value comparison should also remove

the effects of capitalization, as EV does. The EV/Revenues of 2.08 seems in line with the performances in the

same group.

EV to EBIT indicates that the market has valued Tottenham at 31.20 for its operational result. The ratio is the

highest in its group, suggesting a good efficient use of a company's resources.

Looking at the chart of Operating Profit Margin and the relation with Avg. Net Goals/Revenues, the

Tottenham seems to operate against its revenue quite well in relation to the average net goal. This means

that the team takes good advantages of their goal-scorers.

5. Stock price and Seasonal performance analysis

a. Stock Value

To understand if the current stock price of £13.80 is fairly valued the information gathered from the DCF

analysis will be used. The NPV reflect the future earnings of the company and it can be used to define the

Company Fair value1. As equity investors, we are interested in the value of the company's shares alone.

To come up with a fair value of the company's equity, the net debt2 (£16.79M) is being deducted providing

then equity’s fair value of £50.89M. Dividing the Fair value by the the number of outstanding shares (9.29M)

It is possible to calculate the new fair value of the stock of £5.42.

Another parallel criterion that can be used to value the stock is based on the P/E ratio3. The P/E ratio for the

current Tottenham stock price is 366. This is a very high value and it is suggesting that the current stock is

over-valuated. This is because the Earning per Share is only £0.038 (or 3.8 p) due to the large number of

shares (9.29M) and a very small earning available to shareholders (£0.35M).

1 UK GAAP for Business Practice - Paul Gee 2006.

2 http://www.investopedia.com/university/dcf/dcf4.asp

3 Corporate Finance: Theory and Practice - Vernimmen P. Quiry P. 2005

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b. Tottenham Games and Stock Market reaction

The variation % of the stock market (TTNM.L and FTSE) is being used in comparison to the games’ results

during the period from January 2004 to May 2007. Roughly this period cover 4 football seasons. Exhibit 3.

Tottenham shows a clear improvement in number of game Won: from 31.3% in Jan-May 04 to a 47.4% at the

end of season 2005-06. The games Lost has decreased from 50% to 23% in the same period. The stock price

TTNM.L has reacted positively to the decrease of game lost with a less variation %, from 2.5 % to 0%, and

more in line with FTSE variations.

During the next season 2006-07 the positive trend has changed with increase of Loss by 5% and decrease of

Wins by 2%. The TTNM.L has followed the increased FTSE level despite poor scoring performances.

6. DCF-based investment decisions

a. Build a new stadium with Financing of £250M

A new stadium will take two years to be ready and it may result in significant economies of scale4. The

revenues related to the new stadium will iincrease by 40% from 2010 and keeping growth of linear 9% till

2019 and 4% for 2020. Sponsorship will increase by 20% from 2010 and keeping growth of linear 9% till 2019

and 4% for 2020. Stadium operative expenses will increase by 14% from 2010 and keeping growth of linear

4% till 2020.

A tax incentive allows offsetting depreciation of £250m over 10 years. In the cash flow projection the cost of

the new stadium of £250m has been allocated during the first 2 year's time.

The financing of £250M will be paid back in 11 years, starting from 2011, with an increased value to keep the

cash balance positive throughout the project’s time. The final calculation provides a positive Net Present

value of £27.51M. Exhibit 4

An extra evaluation on cash flow has been conducted to se the feasibility of the project without financing.

The cash flow projection in Exhibit 5 shows a negative cash balance over several years, stating the inability of

Tottenham to finance the project itself.

b. Sign in a new striker, in addition to build a new stadium

With the new scorer increasing the team’s net goals by 12, the new average Net goal value will be 10; this will

rank Tottenham above the 2.3 Net goals of the New Castle with revenues of £87m and below the 24.6 Net

Goals of the Liverpool, with revenues of £123M. The lifting in ranking position will give an estimated increase

of revenue to about £90M at the 2007 value. The new revenue will follow the forecasted growth of 9% from

2010. The increase of broadcasting rights has been included and the £20M in transfer fee has been

accounted as tax deductible.

Adding the cost and revenues of a new player will increase the NPV to £82.32M. Exhibit 6

4 The Economics of Recreation, Leisure and Tourism - 3Rd Ed. - Tribe, John. - 2004.

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7. Recommendations

The NPV analysis shows that the best option, if no financing is available, is to keep the current situation.

However this choice will not create the possibility of increase ranking and revenues. The current financial

performances, with very low Net income, suggests activities that should be implemented to improve the

company’s bottom line:

Increase ticket price sales5 introducing finance schemes to ease the payment for seasonality tickets;

Reduce direct and indirect costs and overhead expenses;

Defer goal-scorer acquisition ;

Add new sponsorship and Increase prices for merchandise;

Scout young talented football player to reduce payroll;

Increase the credit taken from suppliers.

Negotiate extended credit from suppliers.

Use alternative financing methods, such as leasing the players , to gain access to the use (but not ownership)

Defer dividend payments.

Raise additional equity to significantly reduce its net debt in the short/medium term. If financing is an available option, it should be used to build the new stadium together with the acquisition of a new top scorer. The NPV of £82.32M is favourable compared to the NPV of £27.51 of building the stadium without a new player.

8. Bibliography

Eddie McLaney, P. A. (2008). Accounting, an introduction. Harlow, UK: Pearson Education limited. Paul, G. (2006). UK GAAP for Business Practice. Amsterdam: Boston Elsevier. Pierre Vernimmen, P. Q. Corporate Finance: Theory and Practice - . Tribe, J. (2004). The Economics of Recreation, Leisure and Tourism - 3Rd Ed. -- . Amsterdam: Boston Elsevier. DECLARATION OF ORIGINALITY OF WORK - I affirm that the attached work is entirely my own, except where the words or ideas of other writers

are specifically acknowledged according to accepted citation conventions. This assignment has not been submitted for any other course at Robert

Kennedy College or any other institution. I have revised, edited and proof-read this paper.

CERTIFICATION OF AUTHORSHIP - I certify that I am the author of this paper and that any assistance I received in its preparation is fully

acknowledged and fully disclosed in this assignment /paper /examination. I have also cited any sources (footnotes or endnotes) from which I used

data, ideas, theories, or words, whether quoted directly or paraphrased. I further acknowledge that this written work has been prepared by me

specifically for this course.

5 more than 20,000 are waiting to buy seasonal tickets

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Exhibit 1 – DCF analysis current operations - Page 1 of 2

(*) Working capital is increasing proportionally to Revenue growth of 9%, except for the last year’s prediction

where growth is forecasted at 4%.

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Exhibit 1 – DCF analysis current operations - Page 2 of 2

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Exhibit 2 –Team Valuation, Revenues and Records – Page 1 of 2

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Exhibit 2 –Team Valuation, Revenues and Records – Page 2 of 2

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Exhibit 3 – Games and Stock Market reaction

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Exhibit 4 – DCF analysis in Building a new Stadium with Financing

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Exhibit 5 – Cash Flow Projection for the New Stadium without Financing

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Exhibit 6 – DCF analysis for a New Stadium and New Player

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Exhibit 7 – DCF analysis comparison of three different options